Helicopter Ben Should be Picking Up Dollars, Not Dropping them Down

May 11, 2012

The current economic policy has hinged upon the following equation:


Where P is the amount of productivity in the economy measured by GDP; M is the supply of money often measured by the M2 money supply, and V is the velocity if money (M2) or how often a dollar turns over each year.

In the simplest definition this equation represents the amount of value created by our economy (GDP) is equal to the amount of money in the system (M2) multiplied by how frequently that money “turns over” (V).

The faithful logic is that you can offset a decline in V by raising M to support P. Mathematically this makes sense and would be true if the equation followed only the rules of linear mathematics.

However, the problem is twofold: while M is the only lever that the Federal Reserve has any real control over; V is a value rooted in physics more than math and subject to inertia and indirect responses.

While M follows a linear progression (a $ in = a $ in and a $ out = a $ out) V is subject momentum where the rate of change is neither controllable or linear. The velocity of money tends to follow a trend which is partially fed by the supply of money but which is also fed by human behavior.

Consumption patterns are not linear and we don’t all necessarily start and stop consuming at the same time and the same rates. Moreover, the actions of one group can affect another and positive and negative momentum can drive how much of our paychecks we choose to spend. If our peers appear to be cutting spending we may choose to follow their lead if we presume their caution is correct. Vice versa in the hay days of the late 1980’s/early 1990’s our consumption patterns were heavily influenced by “keeping up with the jones'”.  The chart below illustrates the velocity of M2 in the US since 1950.

Quarterly, Seasonally Adjusted, Updated: 2012-04-27

In theory if V is falling faster and faster, neither a linear increase in nor an imaginable amount of M is going to support P for very long.  At some point the attention needs to move from how we support economic growth to how we arrest the falling velocity of money.

Solving for V, the equation turns to V=P/M.

Turning the equation around, the only method the Fed would have to arrest the current rapid continue decline in money velocity by attempting to make V larger, is actually to reduce M which in the new equation is now in the denominator.

While reducing the supply of money in anathema to growth, the problem is that the issue is no longer solvable until V is stabilized and the only way to stabilize money velocity is to effectively make cash more scarce so that more of the cash available gets used or put to work.  A dogmatic and long term agenda focused on increasing Velocity likely would have its own negative effects, but its clear that focusing on adding more liquidity to an economy awash in liquidity is no longer boosting output and is showing signs of growing impotence.  The best solution would probably at least be to pause on the quantitative easing and let interest rates rise modestly, if nothing else but to give some time for current cash to be circulated more effectively without the anticipation that more is on its way which creates a perception of falling prices.

As interest rates rise the cost of sitting (cost of waiting) on large piles of cash increases as depositors begin to feel the lost opportunity cost of at higher rates or simply consuming the cash.  At the very least it gets people out of the mindset that prices will continually be lower tomorrow and that there is no better alternative to cash.

What the right interest rate would be us as unknown as the grand experiment we are currently in the midst of, nonetheless it seems that our current path beyond being unsustainable may simply be wrong.


Food stamp use still rising despite good jobs news

February 19, 2012

This chart shows how food stamp participation has risen with the unemployment rate since 2005. The last peak in food stamp use occurred in the aftermath of Hurricane Katrina at the end of 2005, and the current peak has far surpassed that.

Source: http://www.csmonitor.com/Business/Paper-Economy/2012/0110/Food-stamp-use-still-rising-despite-good-jobs-news


The American Jobs Act Review (Part I)

September 19, 2011

Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction

Below I comment on on the first few pages (7-12) of the Presidents Plan for Economic Growth and Deficit Reduction .  This is a dense document and my review is neither complete nor my analysis based on sharp political knowledge.  As my blog indicates I focus on anecdotal evidence.  What struck me, having never read such a dense piece of policy, is the transparency of bad and self-serving ideas.  I do not mean for my own biases to negate otherwise good ideas that are also included.

There were a number of good ideas, bad ideas and self-serving ideas layered into the document with lazy political acumen. Below I offer some high-lights, low-lights and some “grow-lights” that seem engineered to increase votes into help Obama’s reelection campaign.  My review starts in the American Jobs Act but stops short of the unemployment insurance section and before the discussion on Mandatory Savings, Health Savings and Tax Reform.  Clearly this list will be expanded when I have more time. I hope to post a Part II in the next day or so.

High-lights – Potential solid policy ideas with opportunities to create longer-term sustainable growth/deficit reduction

Provide a payroll tax cut to businesses, with a focus on small employers: Engineered to adversely help America’s small businesses.  Sadly the GOP will fight all the bad stuff, and ignore all the good stuff in an effort to stonewall into the campaign trail.

Help entrepreneurs and small businesses access capital and grow: One of the more interesting ideas engineered to stimulate entrepreneurship.  Items include: accelerated government payments to small business contractors; establish a framework for “crowdfunding” programs in concert with the SEC to help small companies raise capital; increase in guarantees for bonds to help small firms compete for infrastructure projects (this one smells like special interest handouts like Solyndra, not so good).  Whitehouse could probably raise substantial revenue by Trademarking “crowdfunding”.

Offer tax credits and career readiness efforts to boost veterans’ hiring: Returning Heros Tax Credit of up to $4,800 for unemployed veterans, and a Wounded Warriors Tax Credit of up to $9,600 that will increase the existing tax credit for firms that hire unemployed veterans with service-connected disabilities.”  I’m not sure of the message sent by quantifying the additional $4,800 on for wounded warriors, but the effort by the administration to help our amazing veterans is an excellent idea.

Improving our airports: While in one sense this might fall into the Low-light category due to the State Aid back door issue, this is a real area of need that can create meaningful efficiency improvements for commercial and passenger air traffic.

Funding for innovative transportation: I know this one is controversial primarily due to the call for high-speed rail.  I have seen worse expensive ideas.  The real issue is where we we are going to buy the technology from.  I’d be happier picking a battle that could be levered at least in part to American manufacturing.  Last I checked the Germans and Japanese have this market tied up.  What about retrofitting our transportation sector for electric and natural gas vehicles?  (neither were mentioned under this header)  At least those dollars would go to Ford and GM.

Establish a National Infrastructure Bank: Another controversial idea.  The devil will be in the details.  However, leveraging tax payer money with private investment is generally a winning combination.

Expand nationwide wireless Internet services for the public and the first responders and reduce the deficit: This is progress you can build on.  This is an excellent idea, and NEEDS to be advanced smartly.  These types of investments enhance national productivity while paving the way for REDUCED government expenses.  “The plan includes reallocating the D Block for public safety (costing $3 billion) and an additional $7 billion to support the deployment of this network and technological development to tailor the network to meet public safety requirements. This is part of a broader deficit-reducing wireless initiative that would free up public and private spectrum to enable the private sector to deploy highspeed wireless services to at least 98 percent of Americans, even those living in remote rural and farming communities.”

Grow-lights – Potential spam policy designed to provide short term stimulae to directly affect the 2012 election outcome.

Establish a complete payroll tax holiday for new jobs or wage increases: “CBO has identified this type of job creation tax cut as one of the most effective ways to help accelerate job growth.” Has the additional benefit of feeding the hope that POTUS gets reelected.  Tax holiday’s do nothing for long term sustainable growth.  They attempt to help politicians get reelected.

Extend 100 percent business expensing through 2012: “Extend 100 percent business expensing through 2012. “The President is proposing an extension of the 100-percent expensing provision that he signed into law in 2010, which rewards firms for making investments by allowing them to deduct the full value of those investments from their tax obligations through 2012”  Anything applied to 2012 explicitly automatically must be red-flagged into the campaign finance bucket.

Investments in making our Nation’s highway systems safer and more efficient: This one reeks of the job creation crack pipe.  A quick jolt, followed by a pronounced feeling of emptiness and wasted effort.  Has anyone ever been on a highway that is not currently under construction?  They are always under construction.  Try I-95 any day of the week.

Repairing transit systems and improving our rail systems:  Ironically this did not get labeled the Buffet Bill.  Somehow I wonder.

Expediting high-impact infrastructure projects: Government should not expedite anything that costs lots of money.  Unless of course there is a pending election.  That would be like having a 12 year old rush out to buy a car.

Low-lights – Potential counterproductive ideas that either stifle growth/spending reduction or are so absurd as to assure better policy measures get stonewalled in partisan politics.

Prevent teacher layoffs and keep police officers and firefighters on the job: These are the hand outs that the GOP cannot afford to fight against.  This is the “feel good” wasteful spending policy.  I in no way want to imply that these aren’t areas of dire importance and need, but they way this is framed it reads as backdoor aid to States which the GOP would never approve. I firmly believe that we need to invest in teachers, police officers, fire fighters, American Flags and apple pie.  That goes without saying.  What I can’t stand is the lemonade stand run by kids living in a McMansion.  Don’t patronize me to believe that dollars earmarked here will actually end up appropriated to the constituency being exploited to raise the funds.  If this passage turns into a backdoor blank-checks to the states, we will NEVER see this idea fulfill its intent.  It is noble in its spirit, but probably will fail in practice.  When 50 states chime in, this one is poised to end up to be so messy its never gets done and certainly not in the spirit it intended.  I’d be willing to bet that if this gets through a beleaguered Illinois may wind up with the best public schools in the country :)

Modernize at least 35,000 schools: ibid above.

Opportunities for all in the transportation sector: Always be suspect of any small numbers in a $4 trillion dollar plan. “The President’s plan will invest an additional $50 million in 2012 to enhance employment and job training opportunities that will benefit minorities, women, and socially and economically disadvantaged individuals in transportation-related activities, including construction, contract administration, inspection, and security. His plan will also invest an additional $10 million in 2012 to help minority-owned and disadvantaged business enterprises gain better access to transportation contracts.”  Also be suspect of any language that says “for all”.  This implies “for all voters”, and is so transparently engineered to buy votes in swing states.  What we need to is have this $60 million included in the campaign finance budget, as this is really what this item will be used for.

Put people back to work rehabilitating homes, businesses, and communities:  Not a fan of this one.  “Many regions with concentrated home foreclosures also have concentrations of vacant commercial structures that weigh on property values and make it less likely that new businesses will come into the community and invest new capital.”  On the plus side its an attempt to help depressed communities revitalize and proposes a public private partnership to do so.  Conversely, many of these geographies were over leveraged and over developed.  Beautifying defunct towns and sweeping empty streets wont do much without a natural job-base.  If residential and commercial real estate are defunct, there is a good reason.  We need to allow some ghost towns to become tourist traps.  I don’t say this without real empathy for those who may still be living in these areas, and substantial regret for their situations.  This kind of investment only rewards speculators.  Spending precious tax dollars in unsustainable communities is not the best and highest use of our nearly depleted fiscal stimulus.  For a fraction we could probably help remaining residents relocate to areas of the country where there are jobs, and help those communities enhance local infrastructure.  We need to be wise, not smart in how we do this, and to leverage investments that can create innovation and productivity, not social assistance.   This falls into the 2012 jobs for re-election bucket.  It’s also a back door bailout of regional banks.

What if Solar Energy was Subsidized like Fossil Fuels? [Infographic]

September 11, 2011

Self Explanitory


WSJ Blog: Economists React: ‘Disturbing’ Way to Start Labor Day Weekend

September 2, 2011

From the WSJ Blog:

SEPTEMBER 2, 2011, 11:38 AM ET

Economists React: ‘Disturbing’ Way to Start Labor Day Weekend

Economists and others weigh in on the unchanged nonfarm payrolls number and steady 9.1% unemployment rate.

The stagnation in payroll employment is an ominous sign. The monthly gain in payrolls has now been below 100,000 for four consecutive months and the unemployment rate has been stuck at around 9% since the start of the year. –Paul Ashworth, Capital Economics

 Disturbing. There is no other way to describe the August employment report. The economy added exactly zero jobs over the month, the first time that precise number has occurred since World War II. Worse, the totals for both June and July were revised downward sharply. Indeed, if August is also downgraded we could see a negative number. The details were as distressing as the headline number. You have to back out the roughly 45,000 Verizon strikers who didn’t appear on the payrolls. They are back and will boost the September job numbers but even if they were working, the gain would have been disappointing. Except for health care few areas posted increases. –Naroff Economic Advisors

Not exactly the ideal way to start off the Labor Day holiday. Even though there were a host of one-time item impairing August’s results — fears of a government shutdown, strikes, and back-to-school seasonal factors being the most prominent — it’s hard to find any silver lining to this month’s dark cloud. The private sector payrolls increase of 17,000 was easily the worst in eighteen months. –Guy LeBas, Janney Montgomery Scott

What is particularly “bad” is the earnings data. We often say that the economy could create a trillion jobs each month but if nobody is earning any money, consumer spending is going nowhere. In August, average hourly earnings fell by 3 cents to $23.09. While this follows a decent gain in July, the year-over-year change in earnings is just 1.9%, a terribly weak rate of wage growth. Further, average weekly hours fell by one tenth. This is not good… Irrespective of any “one offs” that are skewing the data, job creation is the lifeblood of an economy — not necessarily equity prices. Without it, people should really cease acting surprised that consumers aren’t spending a ton of money, think we’re still in a recession and find their confidence falling through the floor.–Dan Greenhaus, BTIG LLC

The economy added no net new jobs in August, suggesting that the weak economic momentum of the first half of the year is carrying into the third quarter… The details in the establishment survey were categorically weak. Only the acyclical education and health services sector, leisure and hospitality and business services added jobs during the month. There were weakness across the board, with jobs losses in information, retail, manufacturing, construction, government all losing jobs. –Millan L. B. Mulraine, TD Securities

Declining labor force participation has kept the unemployment down to the 9.1% rate — not the way you want to keep the unemployment down. The aggregate hours index declined and thereby suggested less total labor input and thereby a likely continuation of subpar economic growth. –John Silvia, Wells Fargo

The importance of job growth cannot be overstated, as the wage and salary income that a labor market recovery, even a sub-par one by historical standards, provides to consumers is critical in providing fuel for ongoing economic growth. Therefore, a weak report for August is bad news indeed, Moreover, there is plenty of other evidence pointing to ongoing labor market struggles –Joshua Shapiro, MFR Inc.

Nonfarm payrolls are one of the four indicators the NBER puts most emphasis on, when determining business cycle turning points. Against this backdrop, today’s weak number – flat employment in August plus downward revisions to the previous two months – clearly raises the specter that the US has already entered or is at least close to enter another recession. –Harm Bandholz, Unicredit

All in all, the data look more consistent with continued growth at an unsatisfactory slow pace than with a new recession. Incorporating today’s data, our recession probability model remains at roughly 30%. –Jay Feldman, Credit Suisse

The problem doesn’t seem to be an upsurge in firings, since initial unemployment claims have not climbed, but a lack of hiring, resulting from a lack of growth in demand and huge policy uncertainty. The extreme uncertainty over the outcome of the debt-ceiling debate probably did extra damage to the August figures. Recent trends are perilously close to stall speed for the economy. They don’t yet say that we have tipped into recession, but that risk remains high (40% odds, in our view). –Nigel Gault, IHS Global Insight

There are two big questions hovering over the markets and, to my mind, today’s numbers did little to answer either. First, we knew the economy was relatively soft in August. Is August’s soft patch going to be a one‐month hiccup or a longer‐lasting weakness that gathers momentum? While the incoming August data is important, I would place much more weight on the yet‐to‐be‐determined performance of the economy in September. Second, what does Ben Bernanke have up his sleeve? We all know that Bernanke is predisposed to act, and today’s data will only reinforce the resolve of Bernanke and the doves on the FOMC to push another button. In fact, I find it hard to imagine that the Fed would hold back from acting again over the next meeting or two. –Stephen Stanley, Pierpoint Securities

Financial market volatility spiked in late July and continued at high levels throughout August, leading businesses to delay hiring plans amid the unusually uncertain outlook… In all, this weak employment report will add fuel to the fire for President Obama who is scheduled to present a jobs stimulus package to Congress on 8 September. In addition, the odds are now tilted in favor of additional easing by the Fed, the form of which will be debated vigorously at the 2-day meeting beginning 20 September.–David Resler, Nomura Global Economics

 The problem for Obama and Bernanke is that the employment numbers still aren’t bad enough to galvanize a political response. They are bad enough for lots of competing ideas to enter an arena where the underlying political will is to do nothing lest one party or the other get credit for job creation. Within the FOMC, Bernanke can still drive some sort of response by virtue of his being Chairman and he likely will but it won’t be big — the strong dissent remains and political support among conservatives also remains at low ebb. There is, however, always the possibility that banking problems move the Fed sooner with less dissent. –Steven Blitz, ITG Investment Research

We characterize this employment report as weak with the softness from the establishment report and trends in hours and earnings from the household survey as offsetting the rise in household employment. Net of the Verizon labor dispute, private payroll growth appears to be more in line with that observed in May and June. We see today’s report as increasing the probability of further monetary policy stimulus at the September FOMC meeting. –Michael Gapen, Barclays Capital

We think business confidence is starting to level off, assisted by lower energy prices and robust core retail sales, so fourth quarter payrolls should be better. –Ian Shepherdson, High Frequency Economics

The lack of demand is the single biggest problem. It has led to this slow pace of hiring, especially in small firms in “core” services (which excludes health and education). There seems to be little to no help on the way from monetary or fiscal policy, at the federal, state, or local level. It all adds up to little change in a slow labor market over the next few months. – Bart van Ark, Conference Board

 The adjusted payroll gain seen in August was the weakest of the year despite the fact that jobless claims during the month were below year-to-date average (and well below the average seen during the prior 3 months). The combination of relatively low jobless claims and low net employment growth suggests that new hiring decelerated quite a bit in August. This is consistent with the notion that the political environment has had a powerful negative impact on business sentiment. While we don’t have a timely broad-based measure of business perception of government policy, the University of Michigan survey asks households every month for their opinion about the government’s economic policy. The August results showed the highest degree of dissatisfaction in the history of the survey, which stretches back to 1978. –David Greenlaw, Morgan Stanley

Wrangling in Congress and the eventual deficit deal underscored the inability of government to jump-start the labor market. Employers and consumers have lost confidence in the economy, with employers increasingly hesitant to hire and consumers fearful about the future. Rising costs have not helped nor has vanishing household wealth. –Sophia Koropeckyj, Moody’s Analytics

It’s often said when it rains, it pours. That is an apt description of the August employment report and the likely path in the labor market later this year. Given slowing growth in the real economy there is little in the employment report to indicate a pickup in job creating heading into the final 16 weeks of 2011. –Joseph Brusuelas, Bloomberg

Punchline: Debt Ceiling Redux

September 2, 2011

The punch-line to the original August 2 2011 debt ceiling deadline: it’s September 2, 2011 and We’ve Already Hit the New Debt Ceiling!  Holy shite.

The Debt Subject to Limit is the maximum amount of money the Government is allowed to borrow without receiving additional authority from Congress. The current statutory limit is $14.694 trillion.

US Treasury Debt Subject to Limit Graph (The current statutory limit is $14.694 trillion.)

It’s 1938 all over again: Illusion of Recovery – Part I: Print and pray has officially failed by Eric Janszen

September 2, 2011

One of the most compelling and complete explanations of our economy over the last few years. Followed by a strong argument that both explains and continue to support the possibility for further parabolic moves in gold as it transforms into the world’s global reserve currency.

Well worth the time.  I particularly liked the call for further investment in domestic energy and communications infrastructure.  Far more important than bridges to nowhere.  Someone PLEASE send this to the current administration before Obama makes his speech next week.


Illusion of Recovery - Eric Janszen

“The incipient recession that the stock, bond, and gold markets smell is not a so-called “double dip” recession. It is a mid-gap recession, a recession that occurs in the midst of an output gap, a far more serious economic event than a recession that produces an output gap. The US has not experienced a recession inside of an output gap since 1938, except for one produced on purpose by the Volcker Fed in 1983 to squeeze the last breath of life out of an inflation spiral that was showing signs of resurgence in 1982. ”

Click here for the full story:  http://t.co/98THRVM

Thanks to Paul Kedrosky.